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Why Is KLA (KLAC) Up 24.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for KLA (KLAC - Free Report) . Shares have added about 24.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is KLA due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

KLA Q1 Earnings Beat Estimates

KLA reported first-quarter fiscal 2023 earnings per share of $7.06, beating the Zacks Consensus Estimate by 13.5%. The figure was up 52.2% from the year-ago fiscal quarter’s level year over year and 21.5%, sequentially.

Revenues increased 30.7% from the year-ago fiscal quarter’s level and 9.6% from the prior quarter’s level to $2.72 billion, surpassing the Zacks Consensus Estimate by 5%. The reported figure was near the higher end of management’s guided range of $2.475-$2.725 billion.

Strong customer demand across major product groups drove the quarterly results.

Solid performance of the Patterning systems business was attributed to strong growth of the EUV mask shop inspection in 5nm and below applications as well as growth of mask shop and wafer fab applications in mature node applications.

However, global macroeconomic headwinds, including inflation and COVID-related issues in China, and supply-chain constraints negatively impacted demand for semiconductors in PC’s and other consumer-facing markets during the fiscal first quarter.

KLA expects its systems and service revenues to be affected in the near term by the U.S. government-announced export regulations on the sale of U.S. semiconductor technology to China.

Top-Line Details

Products revenues (accounting for 81% of total revenues) increased 34.7% year over year and 11.2% sequentially to $2.196 billion.

Services revenues (19% of total revenues) were up 3.4%, sequentially, and 16.5% from the year-ago quarter’s reading to $528.8 million.

Growth in Services revenues is attributed to the expanding installed base, continued high utilization rates, increasing customer adoption of long-term service agreements and expansion of Service opportunities in the legacy nodes.

In terms of reportable segments, Semiconductor Process Control revenues (88% of total revenues) increased 35% year over year to $2.398 billion, driven by strength in Foundry & Logic. Foundry & Logic accounted for 63%, while Memory constituted about 37% of semiconductor process control systems’ revenues. Specialty Semiconductor Process revenues (5%) were $127.9 million, up 25% year over year. PCB, Display and Component Inspection revenues (7%) declined 1% from the year-ago quarter’s actuals to $200.7 million. The decline was due to slowing consumer electronics markets, mainly in mobile phones.

The Electronics, Packaging and Components or EPC group reported strong quarterly results, driven by strength in automotive, 5G and advanced packaging.

Regarding revenue breakdown by major products, Wafer Inspection, Patterning systems, including metrology and reticle inspection, and Specialty Semiconductor Process accounted for 41%, 27% and 4% of KLA’s total revenues for the fiscal first quarter, respectively. PCB, Display and Component Inspection accounted for 5%, Service represented 19% and Other — reported in the Semiconductor Process Control segment — constituted 4% of the quarterly revenues.

In terms of regional breakdown of revenues, China, Taiwan and Korea accounted for 31%, 27% and 15% of the total revenues for the fiscal first quarter, respectively. The United States of America, Japan, the European Union and South East Asia accounted for 9%, 8%, 6% and 4%, respectively.

Operating Details

Non-GAAP gross margin expanded 50 basis points (bps) from the prior-year quarter’s level to 63.4%. The figure was near the upper end of the guided range of 62-64%.

Research and development (R&D) expenses increased 23.4% year over year to $318.5 million. Selling, general and administrative (SG&A) expenses also increased 31.4% year over year to $253.98 million. As a percentage of sales, R&D expenses contracted 70 bps year over year to 11.7%, while SG&A expenses matched the year-ago figure of 9.3%.

For the reported quarter, non-GAAP operating margin was 44.1%, expanding 190 bps year over year.

Balance Sheet

As of Sep 30, 2022, cash, cash equivalents and marketable securities totaled $2.95 billion compared with $2.71 billion on Jun 30, 2022.

Cash flow from operating activities was $1.01 billion for the fiscal first quarter compared with $819.2 million in the prior quarter. Free cash flow was $927.2 million for the reported quarter compared with $746.1 million in the prior quarter.

During the fiscal first quarter, KLAC paid out $188 million as dividends and repurchased $90 million of shares.

Second-Quarter Fiscal 2023 Guidance

For first-quarter fiscal 2023, revenues are expected between $2.650 billion and $2.950 billion. KLA expects non-GAAP EPS within $6.30-$7.70.

Management expects non-GAAP gross margin in the range of 61.5-63.5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

The consensus estimate has shifted 12.34% due to these changes.

VGM Scores

At this time, KLA has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, KLA has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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